Holden has around 14 per cent of his fund in such companies, with large positions in Borders & Southern, Falklands Oil and Gas and Rockhopper. He says that current share prices do not reflect the quality of the discoveries made so far, meaning that investors can access this story cheaply.
"The bears would say beware of Argentina. Most experienced investors are relaxed on that front, but it does make operating down there more expensive," he explained.
"In the meantime you have an area with a number of exciting hydrocarbon discoveries."
"The first one in the north basin is by Rockhopper. They have already farmed out the find to bigger industry and have sold 60 per cent of the rights to Premier Oil."
"We were surprised that a deal that secured financially that development resulted in the share price falling."
"Right now the stock is at a level that is extremely attractive if you have a long-term investment horizon. You can get access to 40 per cent of the Sealion discovery for effectively half the price."
"The most interesting area with even bigger potential upside is to the south of the Falklands. Borders & Southern and Falklands Oil and Gas are both operating there."
"Borders & Southern have made a gas condensate discovery. The find is potentially worth five or six times the current share price."
Holden’s £85.9m fund has had a difficult year, losing 3.79 per cent while its FTSE All Share benchmark has made 9.55 per cent, according to data from FE Analytics.
Performance of fund vs sector and index over 3-yrs
Source: FE Analytics
The fund contains only 20 positions, which Holden believes makes it the most concentrated in the IMA universe.
It is aggressively positioned for growth, also holding oil exploration companies that operate in east Africa.
Angelos Damaskos, manager of the MFM Junior Oils Trust, is less optimistic about the prospects for Falklands oil.
He said: "We have consistently avoided the Falklands explorations over the past eight years because we feel the risk is far too great, so the risk/reward ratio in our view is not attractive."
Damaskos explains that even if Argentina is unlikely to go to war over the islands again, by refusing to allow access to its ports, the country can hinder exploration in the area and make the finds uneconomic to explore.
He says that the gas find south of the Falklands is of dubious value given the difficulty of transporting the resource from such a remote place.
"They need to find a billion-barrel discovery to make it economic, and that’s not where we are currently."
Reuters reported last week that hedge fund managers were building up their positions in the exploration companies operating off the islands, but Damaskos says this may be because they anticipate the companies being bought and the share prices rising as a result.
"The industry's players are looking to the smaller companies as attractive acquisition targets," he explained. "Plus the oil sector has been oversold in relation to the oil price."
Damaskos is more optimistic about the potential in east Africa.
"We have seen some spectacular finds in the region," he said. "Tullow Oil has made large discoveries in Kenya and investors have over-looked Africa because of the political risks."
"We expect there’s a lot more to be found in Africa, so it’s an attractive area and a safer bet in our view."
Holden believes the potential upside in Falklands shares more than makes up for the volatility, although he admits that in the short-term investors need to be prepared to cope with the typical problems associated with small cap investing.
"It’s difficult to trade these shares as they’re not the most liquid so you have to wait for big news events to get the liquidity," he said.